If you live in a major metropolitan area, you are all too familiar with rising rental rates year after year. It’s increasingly becoming a problem, mainly because on average, incomes per household are not keeping pace. The cost of renting a residential property has been steadily rising since 2005 and doesn’t seem to be showing signs of slowing anytime soon.
The Furman Center in New York conducted research on rising rents last year in New York City (which has some of the highest rental rates in the U.S.) and found that from 2005 to 2012, the median rental rate rose by 12% while the median household income only rose by 2%; it’s easy to see that there is something very wrong with this situation.
Of course, not every major metro area has been hit as hard as NYC with rental prices soaring 75% from 2000 to 2012, but many are feeling the crunch. So what’s to blame? It’s hard to simply blame just rising rental rates or stagnant household incomes individually, so let’s examine each.
What Contributes to Higher Rental Rates?
There are many variables to this question with even more minute differences from city-to-city and state-to-state, but here is a list at the heart of the others:
- Supply & Demand – For the past few years, rental housing availability has been steadily going down while the recession has forced many more people to rent residences in record numbers. Simply put, there just aren’t enough housing units to accommodate the growing number of renters out there. Additionally, since most urban metro areas are fast becoming hot spots for relocation, property owners are finding that raising rental rates is very lucrative.
- Higher Quality of Life – Some areas have always been nice places to live and some have gentrification to thank for it, but unfortunately it’ll cost you. Do you like the fact that a certain area has clean streets, safe neighborhoods, good schools, nearby shopping, and a cop on every corner? Expect to pay top dollar for these amenities like a vacation add-on.
- Economic Growth – If you create jobs, they will come. Everyone likes to avoid traffic and live close to work; the only problem is that often times housing in economic powerhouse areas like downtown metro areas are wanted by wealthier tenants, so property owners look to oblige their needs over anyone else. Why give you a reasonable rate when they can get a high wage earner to pay more?
- Market Speculation – This kind of rise in rental prices can be the most frustrating because it can seem arbitrary at times. If an area is being renovated, property owners will assume that as the area goes through some gentrifying, big money will soon be moving in and looking to invest. Nine times out of ten, these owners are correct that wealthier patrons will take interest in the newly renovated area quickly before property prices catches up.
What Contributes to Stagnant Incomes?
Like rental pricing, reasons for household incomes leveling off can vary greatly, but here a few general reasons why you may be struggling to pay your rent:
- Higher Taxes – Ever get the feeling that your wage isn’t going as far as you’d like it too? We already lose about a third of our checks on average to income taxes, but what about companies? Corporate taxes can be a drain on operating costs, especially for small to medium businesses. If you wish your boss would just give you a raise, consider that perhaps he or she just can’t.
- Minimum Wage vs. Value of Work – Minimum wage laws are put in place with the good intention of guaranteeing people livable wages to compete with rising living costs. The only problem is that companies aren’t always necessarily making more profit and now they have to legally incur more costs. If it becomes too much, they consider laying off workers they feel add the least amount of value to the company.
- Poor Economic Growth – Some areas that depend on particular industries for employing their populace can be devastated for a variety of reasons. Maybe the business itself didn’t keep up with the times. Perhaps government red tape has been messing things up. Whatever the reason, some areas just are not flourishing like they did in the past and have high unemployment.
- Rise of the Machines – Computers and machines are getting better and more efficient all the time, doubling computing power about every six months. Whole lines of jobs have been either outsourced or replaced by machines (remember when people actually assembled cars? Yeah, neither do I). Nothing spoils a wage quite like not receiving anymore.
Rent is traditionally supposed to account for about a third of your total income, but being that many major metro areas like New York City, Los Angeles, and Miami are getting closer to about half of your check, renters everywhere should feel concerned.
So what can you do about any of this? Should you just simply accept the fact that you may have to move soon? Perhaps try to increase your skill base through professional or self training–the more skills you have, the more an employer will want to keep you and pay you so you can afford that nice apartment.
For some more tips on how to address wage problems, read “Addressing the Problems of Stagnant Wages.”